Will Fed Policy Kill the Greenback’s Appeal

07.29.2011

Newsroom

Philosophies come into relief as markets gauge viable alternative to the U.S. Dollar.

The currency wars have killed the “United States of Europe” but left the Euro very much alive. The dream of a currency union paving the path toward an integrated and federate European continent is essentially done. In its place is a post-nation-state legal tender that provides a viable alternate global currency to the U.S. Dollar.

This does not bode well for the greenback.

The custodians of the Euro (European Central Bank) are focused solely on the value of the Euro versus economic growth in any one country. Nor are the political or social integration of member countries its charge. As such, the E.C.B can devote its full attention to maintenance of a trans-national currency whose value is far greater than its constituent parts.

The Euro was created by businesspeople and finance ministers. But, with memories of 20th-century wars still fresh, the Euro picked up the goal of “uniting” Europe. Those memories are fading as citizens of its member states rebuke greater political and social integration efforts.

This became apparent in the 2010 Greek debt crisis. The “Greek” problem was thought solved with some kick-the-can efforts that bought time for Greece to find a resolution to its debt situation.

One year later, the bells are tolling again. Now, though, eurozone members are buying time for a different reason: preparing the continent and world markets for the possibility that the nature of the zone may change but the value of the currency will always be defended.

Expectations are that Greece may abandon the Euro or even default. (Apparently the eurozone has an exit door, as well as an entrance.) Yet there hasn’t been a dramatic collapse in the Euro’s value.

The E.C.B and its core economies have made clear that protection of the Euro’s integrity is its sole objective. eurozone members will absorb, spread out and pass on the costs of Greece’s debt. (They are joined by commitments from the International Monetary Fund and, by extension, the United States.)

While the U.S. Dollar has been used as a de facto global currency since the end of World War II, with some economies pegging their currency and monetary policy to it, concern for the U.S. is what guides the dollar’s monetary policy.

In contrast to the Euro, the decision makers for the dollar (the Federal Reserve), the stewards of its value, are beholden directly to the citizens of a single country. This has a direct effect on the way the Fed guides the dollar, balancing price stability with growth objectives. The Fed’s priority is the United States of America and not its debt-holders or countries that rely upon its monetary policy for their own economic welfare.

The Euro is the legal tender in 17 sovereign states with a combined population of 330 million and a GDP of $16 trillion. The largest E.C.B. member country, Germany, constitutes less than 25 percent of its total population and 20 percent of total GDP. The relative size of any single country, particularly a periphery nation like Greece (population 11 million, GDP of $305 billion) pales in comparison to the sum of its parts.

The U.S. Dollar is the official currency of 310 million American citizens who generate more than $14 trillion worth of goods and services.

Asset purchasers look at the eurozone and see a central bank that stands by its interests, e.g., the Euro — and not the needs of a “problem” country’s citizens. By contrast, asset purchasers look at the U.S. Dollar and a central bank addressing the needs of the United States.

The Fed should look at the E.C.B in relation to the Euro and focus on the integrity of our currency and leave growth to the private sector and congressional fiscal policy.
Fiscal policy would then be measured against a higher yardstick, and the world would appreciate the competition for the Euro; the U.S. economy would reap the rewards. RT

Mark Phillips is an economist and former Wall Street analyst. He holds an M.S. in applied economics from the University of Michigan and a B.S. in economics and philosophy from the London School of Economics.